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Snapchat – Facebook Competitor or the Next Twitter?

The upcoming IPO of Snap, the parent to social media app called Snapchat, is generating widespread discussion on several fronts.

The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.

There’s the gossip factor where Co-Founder and Chief Executive Officer, Evan Spiegel is famously engaged to Australian model, Miranda Kerr. There’s also the fact that in 2013, Facebook offered to buy Snap for US$3 billion in cash and the co-founders of Snap rejected the offer stating:

“There are very few people in the world who get to build a business like this … I think trading that for some short-term gain isn’t very interesting.”

It was a daring move to turn down that type of offer especially when shortly afterwards, Snap raised another US$50 million in a Series C financing round at valuation of about US$2 billion, as speculated. At the time, Snap was not even two years old; the co-founders of Snap were in their early 20s and had no experience of running a company; and Snapchat generated no revenues.

Fast forward just over 3 years and Snap is on the verge of listing on the New York Stock Exchange on 1 March with an expected valuation of between US$19.5 billion and US$22.2 billion, a premium to its last private financing valuation of US$17.8 billion as of May 2016, according to The Wall Street Journal. Prior to its IPO, Snap has raised US$2.4 billion in private financing from bluechip technology companies and venture capital firms such as Alibaba, Tencent, Kleiner Perkins Caufield & Byers and Sequoia Capital. At the proposed IPO marketing range of US$14 to US$16 per share, Snap will raise between US$3.2 billion to US$3.6 billion.

However, not everything appears as rosy for Snap as the headlines would suggest. Snap’s initial proposed IPO valuation was expected to be closer to US$20 billion to US$25 billion but after preliminary feedback from investors, a reduced valuation is now being marketed to IPO investors. Investors have raised several legitimate concerns about the Snap IPO and have questioned whether Snapchat can really be a long-term competitor to Facebook or whether it faces the same public company fate as Twitter, which has experienced slowing user growth and is trading well below its IPO valuation from three years ago.

Before we tackle that question, let’s start with the basics.

What is Snap?

Snapchat was founded in 2011 as an app where users could share a photo with friends but that photo could only be viewed for a period of time and then disappears and is not saved.

This feature resonated with teenagers and millennial users and Snapchat has quickly become one of the most widely used apps in the U.S.

The majority of Snapchat users are 18-to-34 years old with users younger than 25 among the most active, visiting the app more than 20 times a day and spending more than 30 minutes a day according to the company.

Since its launch, Snapchat has added videos as well as the ability to send a photo or video to all of the user’s friends, called “My Stories”. It also added publisher stories in early 2015, opening up the feature to businesses who could generate revenue for Snap. Its photo and video sharing have more features including lenses that superimpose over a user’s face and filters that allow for a user’s location or brands to also be featured in the photo or video.

However, before filing for its upcoming IPO, the company renamed itself to Snap and began describing itself as a camera company. As part of this change, it unveiled US$130 camera-equipped sunglasses, called Spectacles, that can record short videos. This strategic venture into hardware potentially gives Snap another source of revenue, but also presents new challenges for Snap such as managing manufacturing supply chains, inventory and delivery.

Snap’s vision for the camera as a central feature in the smartphone and how users utilise the camera in their everyday lives is prescient. As augmented and virtual reality develops, the camera will become an increasingly important feature and not just be used to take photos and videos – it will be used to do things on the internet such as search, transact in e-commerce and make payments. However, Snap is hardly the only company to recognise this trend – the largest technology companies such as Apple, Google, Facebook and Microsoft are all developing augmented and virtual reality businesses with the camera as a central part of the strategy, so it remains to be seen whether Snap can compete with these giants.

Snap’s post IPO fate

We believe it is likely that Snap will successfully execute its IPO given the current optimism in financial markets. The lack of IPOs being offered at the moment will also play a factor. However, investors have raised several concerns about the short-term prospects – will the shares actually go up in the first few weeks after IPO? – as well as the long-term prospects of Snap – will the company be a viable competitor to Facebook and start generating profits?

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